Cash basis and accruals basis for sole traders

How the two bases differ

On the cash basis, income and expenses are recorded when money is received or a bill is paid. Under traditional accounting they are recorded by the date of the invoice or bill (GOV.UK: cash basis).

Traditional accounting, also called the accruals basis, follows generally accepted accounting practice: debtors, creditors, stock, accruals and prepayments and depreciation with capital allowances. Companies must calculate their trading profits this way (Corporation Tax Act 2009 s46).

The two bases compared

	Cash basis	Accruals basis
When income counts	When the money is received	When it is earned and invoiced
When costs count	When paid	When incurred
Debtors, creditors and stock	Not recorded for tax	Recorded at the period end
Equipment and most capital spending	Deducted as an expense when paid	Capital allowances
Cars	Capital allowances	Capital allowances
Who can use it	Eligible sole traders and partnerships	Any business

The rules from 6 April 2024

HMRC's Business Income Manual says all eligible businesses must use the cash basis from 6 April 2024 unless they elect to calculate profits under generally accepted accounting practice (HMRC BIM70000).

HMRC's policy paper set out the changes for 2024 to 2025 onwards: the turnover thresholds for entering and leaving the cash basis were removed, the specific restrictions on interest deductions (which had allowed up to £500) were removed, and the restrictions on loss relief for cash basis losses were removed (GOV.UK: expanding the cash basis). Before 6 April 2024 a business could join with turnover of £150,000 or less and stay in up to £300,000 (GOV.UK: cash basis before 6 April 2024).

Interest is now deductible on the cash basis in the same way as any other expense incurred wholly and exclusively for the trade, and cash basis losses can be relieved in the same ways as accruals basis losses (GOV.UK: expanding the cash basis). See corporation tax losses for the company rules, which are separate.

Who cannot use the cash basis

Limited companies and limited liability partnerships (GOV.UK: who can use cash basis).
Partnerships with one or more corporate partners.
Lloyd's underwriters.
Farming businesses with a current herd basis election, and anyone with a profit averaging election.
Businesses that claimed business premises renovation allowance in the 7 years before the tax year.
Businesses carrying on a mineral extraction trade, and those that have claimed research and development allowance (HMRC BIM72010).

Opting out

A business elects under section 25C of the Income Tax (Trading and Other Income) Act 2005 to calculate its profits under generally accepted accounting practice by ticking the box on its Self Assessment return, and HMRC's guidance says it must tick the box each year it wants the accruals basis (HMRC BIM72055). A person with more than one business can choose the basis for each one (GOV.UK: who can use cash basis).

GOV.UK suggests traditional accounting may suit a business with high stock levels, a complex business, or one that needs bank finance (GOV.UK: cash basis). Accounts on the accruals basis show what customers owe and what is owed to suppliers, which a lender will ask for.

Capital spending on the cash basis

On the cash basis capital expenditure is an allowable expense, except for spending on items including the acquisition or disposal of a business, education or training, assets with a useful life over 20 years, cars, land, and certain intangible and financial assets. Capital allowances remain available on cars where the business mileage rate has not been used (HMRC BIM72035). See capital allowances rates for 2026.

Moving between bases

When a business changes basis, transitional adjustments ensure income is taxed once and only once and expenses are relieved once and only once (HMRC BIM72060). Moving onto the cash basis, for example, a customer debt already taxed under the accruals basis is not taxed again when the cash arrives, and accruals and prepayments from the last accruals year are reversed (HMRC BIM72066). Leaving the cash basis brings a positive or negative adjustment calculated under the legislation (HMRC BIM72055).

Questions

Does the cash basis affect VAT?

No. The income tax cash basis sets how trading profits are calculated. VAT is accounted for under the VAT rules, and paying VAT on cash received needs the separate VAT cash accounting scheme.

Do landlords use the same rules?

Property businesses have their own cash basis rules, which are outside the scope of this trading income summary. See the finance cost restriction for property.

What records does a cash basis business keep?

Records of all sales and income and all business expenses, plus VAT and PAYE records where they apply. The extra records for debtors, creditors, stock and drawings are needed only for traditional accounting (GOV.UK: what records to keep).

In Accountin

In Accountin a sole trader on the cash basis can keep a simple cash book of money in and out, and sole trader and partnership accounts are prepared from the books for the SA103 pages.